Rectification for apparent mistake requires notice of the actual error; a different alleged mistake cannot support enhancement.
Rectification under section 35 of the Indian Income-tax Act, 1922 was held to extend to mistakes apparent from the record, with the relevant record including the materials on which the assessment was founded. However, rectification could not be sustained where the notice relied on one supposed error, namely failure to gross up dividend income, while the real issue was whether credit for tax had been wrongly allowed on an amount not assessable as shareholder dividend in the assessee's hands. Because the notice did not identify the actual mistake, the proposed enhancement lacked jurisdiction and failed.
Issues: (i) whether the Income-tax Officer could invoke rectification under section 35 of the Indian Income-tax Act, 1922, after the repeal of the Phaltan State Income-tax Act for a mistake said to be apparent from the record; (ii) whether the notice and rectification were valid when the alleged error related to credit for tax on dividend income assessed in the hands of a nominee-partner rather than as shareholder dividend.
Issue (i): whether the Income-tax Officer could invoke rectification under section 35 of the Indian Income-tax Act, 1922, after the repeal of the Phaltan State Income-tax Act for a mistake said to be apparent from the record.
Analysis: The surviving effect of the merged-state taxation law preserved assessment machinery for levy, assessment, collection and rectification. The expression in section 35 was treated as covering mistakes apparent from the record and not merely clerical or arithmetical errors. The relevant record was not confined to the bare assessment order, but extended to the materials and proceedings on which the assessment was founded.
Conclusion: The power of rectification under section 35 was available in principle.
Issue (ii): whether the notice and rectification were valid when the alleged error related to credit for tax on dividend income assessed in the hands of a nominee-partner rather than as shareholder dividend.
Analysis: The assessee had been assessed on the footing that he was only a nominal holder and that the real owner of the shares was the firm. On that footing, the dividend amount in the assessee's hands was not dividend income as shareholder income but only his share of the firm's profits. The grossing-up provisions for dividend income applied only where the assessee was assessed as a shareholder. The notice under section 35, however, proceeded on a different supposed error, namely failure to gross up the dividend, whereas the real mistake, if any, lay in allowing credit for tax paid on an amount not assessable as dividend in the assessee's hands. Because the notice did not relate to the actual error, the proposed enhancement could not be sustained.
Conclusion: The rectification was without jurisdiction and could not be upheld.
Final Conclusion: The assessee succeeded because the order of rectification was founded on a wrong premise and the enhancement made under section 35 could not stand.
Ratio Decidendi: Rectification for a mistake apparent from the record can be made only in respect of the actual error disclosed by the record and after notice of the intended enhancement on that very error; where the notice proceeds on a different supposed mistake, jurisdiction to enhance the assessment is absent.